The actions of the Bank of Japan have been called “shock and awe" tactics. But over the past week, they have mostly confused traders.

Japanese shares have surged 65 per cent over 12 months and, on Thursday, had their biggest one-day fall since the Fukushima nuclear disaster, while yields on Japanese government bonds spiked to 1 per cent.

Experts put the volatility down to the big macro shocks of the past seven days, including United States Federal Reserve chairman
Ben Bernanke
­hinting that the central bank could slow down its bond buying as soon as this year.

But they also fear that rising bond yields could indicate that the Bank of Japan’s quantitative easing strategy will be ineffective, in spite of a lower yen.

AFR
AFR

Commonwealth Bank of Australia currency strategist
Joseph Capurso
said a weakened yen alone won’t be enough to get Japan out of its economic malaise, which has created decades of deflation.

“The weak yen will be good for exporters, but it’s not going to remake the Japanese economy," he said. “I think there’s a good chance that towards the end of the year, they’re going to increase their asset ­purchases."

The BoJ is buying around ¥7 trillion a month in assets as one part of its monetary policy regime to try to stimulate the economy. But a trend of rising bond yields would counter any broad attempt to keep rates low and stimulate growth through borrowing.

“It does undermine their case for the way that [the BoJ] expect to stimulate the Japanese economy," Mr Capurso said. “It’s not a good sign if bond yields keep staying up at these levels because eventually it’s going to push up the interest rates of businesses and ­consumers."

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Global reality check

Japan sceptics have not yet been silenced by the apparent success of Abenomics or the policies favoured by Japan Prime Minister
Shinzo Abe
. However, there is no doubt the heavily reduced yen is a boon for exporters and investors have hugely profited from bets on Japanese stocks.

The greenback is buying ¥100.92 ($1.04), up from less than ¥80 one year ago.

“We’ve seen some amazingly positive responses in financial markets to Prime Minister Abe," National Australia Bank’s global head of research,
Peter Jolly
, said. “No market goes one way forever and we were probably due a clean-out."

He doesn’t think QE in Japan will end any time soon because of the magnitude of the task, but markets are clearly worried about the proposition on the back of chairman Bernanke’s comments. “The first sign of Bernanke saying ‘we may taper’ if the data was good in the United States saw a lot of markets that were built on cheap money and quantitative easing unwind. Japan was one of them," Mr Jolly said.

“[Japan is] going to continue to ease for a long time. I think there was a global reality check that if we do see the end of QE at some point in the distance, we may see some asset price reactions and currency reactions."

BoJ minutes released on Monday showed that some of the central bank’s officials believe it will be difficult to reach the 2 per cent inflation target that it hopes to meet through QE.

“There is a sense that the Japanese government has some very heavy lifting to do ahead," Mr Jolly said.

Uncertain future

On the weekend, BoJ governor
Haruhiko Kuroda
rejected the notion that investors were too optimistic about the outlook for Japanese stocks and in effect endorsed the bulls.

Mr Jolly said investors may prefer to see some evidence of internal market liberalisation and sustainable productivity growth before further buying. “Monetary policy can only do so much," he added.

CBA believes it is the collapse of Japan’s current account surplus, not the BoJ’s tactics, that have brought down the value of the yen. The bank’s forecast is for the US dollar to buy ¥126 by June 2014, equivalent to a roughly 25 per cent drop for the Japanese currency from current levels.

“It’s hard to see the Japanese economy turning around in a sustainable way if the primary way [the BoJ] think they’re going to do it is through lower government bond yields, which then pull down interest rates elsewhere in the economy," Mr Capurso said.